News Column

Fitch Rates Roseville Electric, CA's Electric System Revenue Bonds 'A+'; Outlook Stable

July 18, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to the approximately $16.9 million electric system revenue refunding bonds, series 2014 to be issued by the Roseville Finance Authority on behalf of Roseville Electric, a department of the city of Roseville (the city).

The series 2014 bonds, expected to price July 24, 2014, will mature serially through 2034. Proceeds will be used to: (i) refund a portion of the outstanding series 2004 electric system certificates of participation (COPs) and (ii) pay cost of issuance.

In addition, Fitch affirms the following ratings at 'A+':

--$104.3 million of outstanding Roseville Finance Authority electric system revenue bonds, series 2010 & 2013;

--$119.9 million of outstanding COPs, series 2004, 2005A and 2009 (a portion of the 2004 COPs will be refunded).

The Rating Outlook is Stable.

SECURITY

The bonds and COPs are secured by a pledge and lien on the net revenues of the electric system.

KEY RATING DRIVERS

GROWING SERVICE AREA: Roseville Electric provides retail electric service to 55,600 customers within the city of Roseville. The utility continues to see customer growth and the city continues to show signs of economic revitalization.

CONTINUED IMPROVEMENT IN FINANCIAL METRICS: Fiscal 2013 and unaudited 2014 financial results show signs of continued financial recovery as the result of a concerted effort by management to implement rate increases and to strengthen operations. Fitch-calculated debt service coverage (DSC) is still low as compared to the rating category median, but expected to stabilize at around 2.0x.

INCREASED LIQUIDITY: Unrestricted funds increased to 150 days cash on hand (DCOH) at fiscal year-end 2013. This is a significant improvement from a low of 38 DCOH at fiscal year-end 2010 and inline with the current rating category median. Liquidity should continue to improve, given a targeted rate stabilization fund balance of at least 40% of operating expenses.

MINIMAL FUTURE DEBT PLANNED: Roseville Electric does not plan to issue new debt in the near term and its capital plan will be exclusively funded from operations and construction development fees. Debt service and amortization are level over the life of the debt, which provides stability.

SIZABLE MARKET PURCHASES, NO ADJUSTOR: The utility's rate structure does not include an automatic adjustor to capture changes in power costs, which could result in a lag in cost recovery if market prices increase unexpectedly. A large portion of Roseville Electric's power supply is bought in the market through contracts with varying lengths. Active management is therefore needed to ensure the utility is protected from price fluctuations.

RATING SENSITIVITIES

MANAGEMENT OF RATES AND COST RECOVERY: Management of rates to ensure timely cost recovery and maintain stable financial performance is key to the rating, especially given Roseville Electric's reliance on more volatile market purchases and the need to increase renewable resources.

CREDIT PROFILE

The city owns and operates the electric distribution system, serving all customers within the city's 43 square miles. The utility served 55,600 customers in fiscal 2014, a 1% increase over 2013. Energy sales saw a slight decline of less than 1%, due to conservation efforts, after two years of energy growth.

Roseville Electric has moderate customer concentration, with its 10 largest customers accounting for 24% of energy sales and 19% of operating revenue for fiscal 2014 (unaudited). The utility's largest customers have remained relatively stable over the past four years. One of Roseville's larger customers has been experiencing financial issues due to previous management problems and there was uncertainty as to whether its Roseville facility would remain open. The situation seems to have stabilized and Roseville management anticipates the facility staying open for the near term.

ACTIVELY MANAGED POWER SUPPLY

Roseville Electric operates and manages a diverse resource mix that includes city-owned and jointly-owned resources, along with open-market purchases. While the utility's power supply requires active management, Fitch views the resource mix favorably, as it provides balance between fuel types, including hydro, natural gas and geothermal, and a balance between ownership structures.

The utility's 2014 power supply was provided from a combination of output from its owned natural gas plant (52%), power received under long-term contracts with Western Area Power Administration (9%) and Northern California Power Agency (8%), renewable contracts (12%) and market purchases (19%). The utility's power supply strategy is to balance its owned resources with market purchases, depending on pricing and the most cost-effective approach. Budgeting and hedging practices are structured to keep volatility from market purchases at less than or equal to 7.5% of power expense.

Roseville made large market purchases in 2011 and 2012 (approximately 50%) due to the exceptionally low price of power. Purchases decreased sizably in 2013 and 2014 (19% of 2014 power supply), due to low hydropower availability and economic owned generation. The utility projects that market purchases will continue to decrease as energy usage lessens and market prices begin to rise.

Roseville Electric is in compliance with the state's first renewable portfolio standard (RPS) target of 20% renewable by 2013. The target was met predominantly with geothermal generation and some wind and biomass. The utility is reviewing its renewable strategy and looking into long-term, base-load resources.

IMPROVED FINANCIAL PERFORMANCE

Financial metrics have rebounded and show significant signs of improvement. Roseville Electric experienced weakened financial performance and metrics in 2008 through 2010, largely due to rising costs and decreased energy consumption. Overall operating performance was weak and largely supported by transfers from its rate stabilization fund (RSF). The effects of lower fuel costs and prudent rate increases have allowed the utility to increase its coverage and cash position in recent years. Fitch-calculated DSC was 1.84x in 2013, a substantial change from DSC that was below 1.0x in fiscal years 2008 through 2010, prior to transfers from the RSF.

Roseville Electric made transfers into its RSF in fiscal years 2011 through 2013, in order to bolster its liquidity position. Projections show that the utility plans to continue with the transfers going forward, with a minimum transfer of $3 million per year. Unrestricted funds increased from a low of $16 million at fiscal year-end 2010, or 38 DCOH, to $52 million at fiscal year-end 2013, or 150 DCOH.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum' - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840527

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Stacey Mawson

Associate Director

+1-212-908-0738

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Kathy Masterson

Senior Director

+1-512-215-3730

or

Committee Chairperson

Dennis Pidherny

Managing Director

+1-212-908-0738

or

Media Relations

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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